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Don't Get Spooked by Spending in Retirement

Kelly LaVigne

Of all the spooky things haunting retirees, running out of money seems to top the list. In fact, nearly two-thirds (63 percent) fear running out of money in retirement more than death, according to the Generations Ahead Study by Allianz Life.

This fear of overspending might be one of the primary drivers of a growing, but lesser-known trend in which people are actually living too frugally in retirement. You read that correctly. Living too frugally in retirement. Many people might be cautious with spending in order to save for retirement, but in many cases that penny-pinching actually increases once the finish line is reached. Why, though?

There are a number of reasons why this might be the case, including lifestyle changes as well as a general tendency to be more risk adverse with age. You might have other reasons for taking a more conservative approach including a desire to leave behind money for beneficiaries, difficulty switching mindsets from saving to spending, and a general lack of awareness around different strategies that can allow for more spending, while still protecting some assets.

[See: 9 ETFs for Retirement Investors to Own.]

Regardless of what might be causing this trend toward being overly cautious and limiting spending, it is concerning. You have worked hard for your retirement years and you can generally afford to enjoy it without having to worry about overspending.

Here are some ideas to help you create a strategy that will allow you to feel more comfortable spending assets in a responsible way, and be able to fully enjoy retirement.

Revise the budget. This can be particularly helpful for those who have already spent a year or two in retirement. You may be relying on a budget created when you were preparing for retirement -- not actually living it -- which could mean some estimates were more conservative. Working with a financial professional, you can identify some areas of wiggle room where you might be able to splurge a little more.

Work part time. If schedules allow, working part time is a good way to bring in additional funds, which may help with additional spending. By having some regular additional income (not tied to a pension or Social Security) it could help you to recognize that there is more available to spend and help loosen the purse strings.

This, in turn, could further help you if you have a tough time switching your mindset from saving to spending. This includes a majority (64 percent) of baby boomers who said they would refer to themselves as "savers" rather than "spenders." Perhaps having a little extra cash on hand will make spenders out of the boomers after all.

Explore different potential income solutions. Working with a financial professional to create an appropriate method to spend down assets strategically -- including potential solutions that offer lifetime guaranteed income -- can help alleviate your fears of running out of money and allow for a more comfortable retirement.

[Read: How to Prioritize IRA and 401(k) Accounts.]

An annuity provides tax-deferred growth potential, a death benefit during the accumulation phase, and a guaranteed stream of income in retirement. This can help retirees access their hard-earned funds in a measured, strategic way, while providing them the confidence that they have income for life with a level of protection against market risk.

Annuities are complex products with many different features, so it's important to consider the limitations, risks and fees associated with an annuity. For variable annuities, be sure to research and understand the investment options' objectives and investment expenses.

Another possible option is a permanent life insurance policy, which provides death benefit protection with the potential to accumulate cash value. If you have built-up cash value, you could work with your financial professional and tax adviser to develop a strategy to access the available cash value through income-tax-free policy loans or withdrawals as a way to potentially supplement retirement income without touching your "budget" money.

Keep in mind, however, that a policy does not provide a guaranteed stream of income in retirement. If you are considering a policy loan strategy, work with a financial professional to carefully manage policy values to help prevent a lapse and potential adverse tax consequences.

Partner with a professional. Figuring out how to spend retirement savings can be complicated. A financial professional can assist with determining how much to decumulate in retirement and which assets to use for what objective. They can also provide a much needed reality check on spending, and can keep you on track -- whether that means allowing you to spend more, or acting as a safeguard to raise a red flag if spending should be reined in.

Fighting fiscal fears. It can certainly be a challenge to change habits developed over a lifetime, but spending money is part of retirement. With proper planning and a sound financial strategy, retirees can enjoy their retirement without having to be scared of spending too much.

So my advice to retirees who feel scared of spending? Play more golf, go on that trip you've been putting off, and don't be afraid to treat yourself once in a while. You've earned it. Having certain financial solutions along with a good strategy prepared with help from a financial professional can help ease that worry, and let you truly enjoy your golden years.

[Read: 5 Tips for Your Retirement Investments.]

Disclosures: Policy loans and withdrawals will reduce the available cash value and death benefit and may cause the policy to lapse, or affect guarantees against lapse. Withdrawals in excess of premiums paid will be subject to ordinary income tax. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. If a policy is a modified endowment contract (MEC), policy loans and withdrawals will be taxable as ordinary income to the extent there are earnings in the policy. If any of these features are exercised prior to age 59½ on a MEC, a 10 percent federal additional tax may be imposed. Tax laws are subject to change and you should consult a tax professional. Withdrawals will reduce the contract value and the value of any protection benefits. Withdrawals taken within the contract withdrawal charge schedule will be subject to a withdrawal charge. All withdrawals are subject to ordinary income tax and, if taken prior to age 59½, may be subject to a 10 percent federal additional tax.

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